ARV / 70% Rule
Realtor · Denver, CO · Member since 2016 · 162 posts · 37 votes
If the ARV of a property in San Diego is $500k, the rehab cost is $40k and you use the 70% rule, that means you have to buy the place for $310,000.
My questions:
- is that possible in the SD market? The purchase price is almost $200k under the sale price which seems way too low.
- Do investors always use the 70% rule in SD area?
- what kind of ROI are you getting?
With due respect, there is bad advice above that I would not use for business decisions, @David Lowe. Your intuition is correct.
The 70% rule of thumb assumes you will be financing your flips using a hard money loan, realistic rehab costs, and that you will use an agent to close at least one side of the flip. For relatively low ARV flips, say less than $250k, which are scarce in southern California, it will provide approximately a 12 to 15% return on the ARV.
Many costs, such as title insurance, utilities, and escrow fees, don't rise much with the ARV, and have a small impact on the return on a flip as the ARV rises. Thus, your project cost (purchase price + rehab costs) can be slightly higher as a percent of the ARV and still maintain the fair return.
For a typical southern California flip, paying 75% of the ARV minus repairs, will result in a 10 to 12% return and we think that's reasonable -- but not a dime more. In your case, David, you can't pay more than $335k for this deal. After all expenses, which were not even close to being accounted for in any example above, I estimate you'll net about $62k, or 12.5% of ARV.
Here are my estimates, which the others above should read, and I know they are reasonable in this region:
You'll find after reviewing many flips, that your return drops about 1% for every percent you exceed a project cost that's 75% of the ARV. That is, in very rough southern California numbers, you'll earn about 5% of ARV if you pay 80% and be lucky to break even at 85%. Why would you even do that? In our view, 10% of the ARV is the minimum return you should make to stay safe (and keep your lender safe).
This is not a solicitation. We don't loan in San Diego. Many local HML's have similar spreadsheets you can use for an evaluation and they will provide these as a courtesy. Lightening does strike on occasion, but it's doubtful you could find enough 70% deals to run a successful flipping business in southern California.
Paying 75% is challenging, no doubt, but these deals are available in enough quantity to make a go at it. Unless you’re an agent and also completely fund using your own cash, please don't rationalize that it's ok to pay more, as many do, or you won't be around long.
(Justin: With purchase price of $382k, rehab at $130k, and ARV of $600k, you'll net about $15k, i.e. ~break even at 85%. With respect, please be careful with this advice, or show all numbers.)
Like other RE "rules" such as the 1% rule and teh 50% rule, the 70% rule is only a rule of thumb. It allows you to quickly evaluate a deal.
With that said, you need to analyze deals with detailed numbers. Use your example, you should be able to make 10% return at a purchase price of 380k.
ARV 500k
Purchase 380k
Sale cost 30k
Rehab 40k
holding cost 5k
Profit 45k
If the ARV of a property in San Diego is $500k, the rehab cost is $40k and you use the 70% rule, that means you have to buy the place for $310,000.
My questions:
- is that possible in the SD market? The purchase price is almost $200k under the sale price which seems way too low.
- Do investors always use the 70% rule in SD area?
- what kind of ROI are you getting?
I'm not flipping locally, so my comments are 2nd hand ... but from the folks I know who are doing it locally, "No." The profit margins I'm hearing are the equivalent of 80-85% more typically.
Like other RE "rules" such as the 1% rule and teh 50% rule, the 70% rule is only a rule of thumb. It allows you to quickly evaluate a deal.
With that said, you need to analyze deals with detailed numbers. Use your example, you should be able to make 10% return at a purchase price of 380k.
ARV 500k
Purchase 380k
Sale cost 30k
Rehab 40k
holding cost 5k
Profit 45k
I'm skeptical. To buy a place for $380k, do a rehab and flip it for $500k still sounds to high. Or is that just what is happening in the San Diego market? I'm not even sure you could command that appreciation in London, England.
If the ARV of a property in San Diego is $500k, the rehab cost is $40k and you use the 70% rule, that means you have to buy the place for $310,000.
My questions:
- is that possible in the SD market? The purchase price is almost $200k under the sale price which seems way too low.
- Do investors always use the 70% rule in SD area?
- what kind of ROI are you getting?
I'm not flipping locally, so my comments are 2nd hand ... but from the folks I know who are doing it locally, "No." The profit margins I'm hearing are the equivalent of 80-85% more typically.
Seriously? That is staggering. So you're saying that if I wanted an ARV of $500k, I should be able to buy a fixer upper for $275k? That just seems improbable looking at the market. What areas are giving those kind of returns?
Kind of like cap rates, I think that you need to get to know your personal market and adjust these rules accordingly. Find people who are currently flipping in your area and ask them for their numbers. From there you'll have a more realistic picture of what the market can bear and what bar you're shooting for.
If the ARV of a property in San Diego is $500k, the rehab cost is $40k and you use the 70% rule, that means you have to buy the place for $310,000.
My questions:
- is that possible in the SD market? The purchase price is almost $200k under the sale price which seems way too low.
- Do investors always use the 70% rule in SD area?
- what kind of ROI are you getting?
I'm not flipping locally, so my comments are 2nd hand ... but from the folks I know who are doing it locally, "No." The profit margins I'm hearing are the equivalent of 80-85% more typically.
Seriously? That is staggering. So you're saying that if I wanted an ARV of $500k, I should be able to buy a fixer upper for $275k? That just seems improbable looking at the market. What areas are giving those kind of returns?
No. By 85%, I mean:
FWIW, (and it may just be the people I happen to speak to most often) most of the activity I see folks doing locally right now is more like:
In other words, less cosmetic $40k flips and more "add a bedroom/second story" stuff.
Like other RE "rules" such as the 1% rule and teh 50% rule, the 70% rule is only a rule of thumb. It allows you to quickly evaluate a deal.
With that said, you need to analyze deals with detailed numbers. Use your example, you should be able to make 10% return at a purchase price of 380k.
ARV 500k
Purchase 380k
Sale cost 30k
Rehab 40k
holding cost 5k
Profit 45k
I'm skeptical. To buy a place for $380k, do a rehab and flip it for $500k still sounds to high. Or is that just what is happening in the San Diego market? I'm not even sure you could command that appreciation in London, England.
High or low, it depends on your local market. If everyone else is making 10% cash on cash return on a flip, chances are you will get similar deals unless you have your own way to find deals others couldn't find.
With due respect, there is bad advice above that I would not use for business decisions, @David Lowe. Your intuition is correct.
The 70% rule of thumb assumes you will be financing your flips using a hard money loan, realistic rehab costs, and that you will use an agent to close at least one side of the flip. For relatively low ARV flips, say less than $250k, which are scarce in southern California, it will provide approximately a 12 to 15% return on the ARV.
Many costs, such as title insurance, utilities, and escrow fees, don't rise much with the ARV, and have a small impact on the return on a flip as the ARV rises. Thus, your project cost (purchase price + rehab costs) can be slightly higher as a percent of the ARV and still maintain the fair return.
For a typical southern California flip, paying 75% of the ARV minus repairs, will result in a 10 to 12% return and we think that's reasonable -- but not a dime more. In your case, David, you can't pay more than $335k for this deal. After all expenses, which were not even close to being accounted for in any example above, I estimate you'll net about $62k, or 12.5% of ARV.
Here are my estimates, which the others above should read, and I know they are reasonable in this region:
You'll find after reviewing many flips, that your return drops about 1% for every percent you exceed a project cost that's 75% of the ARV. That is, in very rough southern California numbers, you'll earn about 5% of ARV if you pay 80% and be lucky to break even at 85%. Why would you even do that? In our view, 10% of the ARV is the minimum return you should make to stay safe (and keep your lender safe).
This is not a solicitation. We don't loan in San Diego. Many local HML's have similar spreadsheets you can use for an evaluation and they will provide these as a courtesy. Lightening does strike on occasion, but it's doubtful you could find enough 70% deals to run a successful flipping business in southern California.
Paying 75% is challenging, no doubt, but these deals are available in enough quantity to make a go at it. Unless you’re an agent and also completely fund using your own cash, please don't rationalize that it's ok to pay more, as many do, or you won't be around long.
(Justin: With purchase price of $382k, rehab at $130k, and ARV of $600k, you'll net about $15k, i.e. ~break even at 85%. With respect, please be careful with this advice, or show all numbers.)
With due respect, there is bad advice above that I would not use for business decisions, @David Lowe. Your intuition is correct.
...
(Justin: With purchase price of $382k, rehab at $130k, and ARV of $600k, you'll net about $15k, i.e. ~break even at 85%. With respect, please be careful with this advice, or show all numbers.)
Agreed. Your post should be the response-of-record here. I was attempting to be cautious in indicating I'm not in this niche (flipping and utilizing HM) and am sharing 2nd hand observations. By "Rehab" I meant all the construction and disposition costs, minus financing. Regardless, I got too sloppy with numbers, and that's not helpful.
The point I poorly communicated was that I see less quick cosmetic flips and more problematic (title, structure, etc) or minor development projects amongst the network of folks here locally. That implies higher budget rehabs and longer timelines.
If you could find a 70% rule property in San Diego that would be a home run. I have seen 2 that other investors purchased recently that likely qualify. Both had BP open houses.
One had title issues that took a lot of leg work to resolve. It was purchased for ~$125K and was going to sell for close to ~$400K but do not know what was spent on rehab but it was a little 2 BR/1 BA property. So I would think the rehab was probably $40K-$50K.
The other has much larger pockets but it was mis-classified as a historic property. When classification was removed and when shared cost with neighbor on a retaining wall that was a huge expense it end up being a home run. The purchaser was unaware at time of purchase that the house was moved to that property and the historic property was erroneous. @Justin R. was part of the BP open house.
I do not do flips but know the San Diego market pretty well. I would not look at the 70% rule as a prerequisite as there are just too few but I would have a prerequisite that the flip should project $100K profit otherwise it is too risky (I would make an exception if you have a lot of experience with flips then maybe it can be worth the risk at a little less than $100K projected profit).
BTW we do a fair amount of rehabs on our buy n holds and we virtually always underestimate the rehab cost. Unexpected expenses should be expected.
Hope this helps.
Hi @David Lowe. I flip in LA and Orange County and I can tell you that from my experience, it's pretty difficult to use the 70% rule. Prices are completely different here on the West Coast compared to the rest of the nation. I've spoken to several investors who also feel the same way. What most of us have done is adjust the rule to see how much profit we want, and work backwards. Instead of calculating what your MAO should be, calculate to find out what your MAO has to be to obtain the profit margin that you seek. Hope this helps. Good luck!
I would have to disagree with your comment. I just flipped 2 properties in San Diego and used the 70% rule there just like I do here in Las Vegas. But as always in real estate it's still about location. When you are talking California properties, the closer to the water the better the price. But the rule doesn't change much. Just have to know your areas in my opinion. BTW Cali is HOT RIGHT NOW!!!!
Thanks
Kind of like cap rates, I think that you need to get to know your personal market and adjust these rules accordingly. Find people who are currently flipping in your area and ask them for their numbers. From there you'll have a more realistic picture of what the market can bear and what bar you're shooting for.
Good call Aaron. California (where I will be investing) is one of the highest priced markets in the US so the margins would be less there than say Maryland. Also, the rules of thumbs would fluctuate.
If the ARV of a property in San Diego is $500k, the rehab cost is $40k and you use the 70% rule, that means you have to buy the place for $310,000.
My questions:
- is that possible in the SD market? The purchase price is almost $200k under the sale price which seems way too low.
- Do investors always use the 70% rule in SD area?
- what kind of ROI are you getting?
I'm not flipping locally, so my comments are 2nd hand ... but from the folks I know who are doing it locally, "No." The profit margins I'm hearing are the equivalent of 80-85% more typically.
Seriously? That is staggering. So you're saying that if I wanted an ARV of $500k, I should be able to buy a fixer upper for $275k? That just seems improbable looking at the market. What areas are giving those kind of returns?
No. By 85%, I mean:
FWIW, (and it may just be the people I happen to speak to most often) most of the activity I see folks doing locally right now is more like:
In other words, less cosmetic $40k flips and more "add a bedroom/second story" stuff.
I'm totally with you. I had thought about flips with a simple facelift rather than an extensive rehab. I can definitely see how an extra bedroom would add on significant value.
I would have to disagree with your comment. I just flipped 2 properties in San Diego and used the 70% rule there just like I do here in Las Vegas. But as always in real estate it's still about location. When you are talking California properties, the closer to the water the better the price. But the rule doesn't change much. Just have to know your areas in my opinion. BTW Cali is HOT RIGHT NOW!!!!
Thanks
SD is a big place, if you are talking about non Metro, we are not really on the same page, Temecula for one is coming close to ditch 70%. Mostly in LA where foreign investors has a problem parking their cash, that's somewhere that 70% won't apply. If say in NV you try to find a flip 3 miles from the strip, will you be able to find 70%? If you go 30 miles out, I'm sure 70% is easy. Also, I use 70% from ARV less rehab for that rule, not ARV - rehab then subtotal and multiply 70% like one post above, meaning for a small 1M house that needs 100k rehab, my MAO is 600k.
With due respect, there is bad advice above that I would not use for business decisions, @David Lowe. Your intuition is correct.
The 70% rule of thumb assumes you will be financing your flips using a hard money loan, realistic rehab costs, and that you will use an agent to close at least one side of the flip. For relatively low ARV flips, say less than $250k, which are scarce in southern California, it will provide approximately a 12 to 15% return on the ARV.
Many costs, such as title insurance, utilities, and escrow fees, don't rise much with the ARV, and have a small impact on the return on a flip as the ARV rises. Thus, your project cost (purchase price + rehab costs) can be slightly higher as a percent of the ARV and still maintain the fair return.
For a typical southern California flip, paying 75% of the ARV minus repairs, will result in a 10 to 12% return and we think that's reasonable -- but not a dime more. In your case, David, you can't pay more than $335k for this deal. After all expenses, which were not even close to being accounted for in any example above, I estimate you'll net about $62k, or 12.5% of ARV.
Here are my estimates, which the others above should read, and I know they are reasonable in this region:
You'll find after reviewing many flips, that your return drops about 1% for every percent you exceed a project cost that's 75% of the ARV. That is, in very rough southern California numbers, you'll earn about 5% of ARV if you pay 80% and be lucky to break even at 85%. Why would you even do that? In our view, 10% of the ARV is the minimum return you should make to stay safe (and keep your lender safe).
This is not a solicitation. We don't loan in San Diego. Many local HML's have similar spreadsheets you can use for an evaluation and they will provide these as a courtesy. Lightening does strike on occasion, but it's doubtful you could find enough 70% deals to run a successful flipping business in southern California.
Paying 75% is challenging, no doubt, but these deals are available in enough quantity to make a go at it. Unless you’re an agent and also completely fund using your own cash, please don't rationalize that it's ok to pay more, as many do, or you won't be around long.
(Justin: With purchase price of $382k, rehab at $130k, and ARV of $600k, you'll net about $15k, i.e. ~break even at 85%. With respect, please be careful with this advice, or show all numbers.)
Really excellent advice and detailed breakdown. Many thanks @Jeff S for the clear explanation.
If you could find a 70% rule property in San Diego that would be a home run. I have seen 2 that other investors purchased recently that likely qualify. Both had BP open houses.
One had title issues that took a lot of leg work to resolve. It was purchased for ~$125K and was going to sell for close to ~$400K but do not know what was spent on rehab but it was a little 2 BR/1 BA property. So I would think the rehab was probably $40K-$50K.
The other has much larger pockets but it was mis-classified as a historic property. When classification was removed and when shared cost with neighbor on a retaining wall that was a huge expense it end up being a home run. The purchaser was unaware at time of purchase that the house was moved to that property and the historic property was erroneous. @Justin R. was part of the BP open house.
I do not do flips but know the San Diego market pretty well. I would not look at the 70% rule as a prerequisite as there are just too few but I would have a prerequisite that the flip should project $100K profit otherwise it is too risky (I would make an exception if you have a lot of experience with flips then maybe it can be worth the risk at a little less than $100K projected profit).
BTW we do a fair amount of rehabs on our buy n holds and we virtually always underestimate the rehab cost. Unexpected expenses should be expected.
Hope this helps.
Your post was a huge help. Thanks @Dan Heuschele
Hi @David Lowe. I flip in LA and Orange County and I can tell you that from my experience, it's pretty difficult to use the 70% rule. Prices are completely different here on the West Coast compared to the rest of the nation. I've spoken to several investors who also feel the same way. What most of us have done is adjust the rule to see how much profit we want, and work backwards. Instead of calculating what your MAO should be, calculate to find out what your MAO has to be to obtain the profit margin that you seek. Hope this helps. Good luck!
Nice post Polar. Thank you. How is flipping going in LA/Orange?
Also, + short term capital gains tax
Can you clarify what you mean?
I would have to disagree with your comment. I just flipped 2 properties in San Diego and used the 70% rule there just like I do here in Las Vegas. But as always in real estate it's still about location. When you are talking California properties, the closer to the water the better the price. But the rule doesn't change much. Just have to know your areas in my opinion. BTW Cali is HOT RIGHT NOW!!!!
Thanks
Interesting Louis. How does San Diego compare to Las Vegas? What areas did you flip the 2 properties in?
Also, + short term capital gains tax
Can you clarify what you mean?
https://www.biggerpockets.com/renewsblog/2014/07/10/paying-taxes-fix-flip-properties/
@David Lowe. Thank you. Flipping is going..it's definitely happening all around me so it feels a bit saturated. The deals are getting harder to find but they're out there. I'm currently in the process of finding my next property to rehab. Good luck!